This Hidden Pattern Could Signal A Pop For Savvy Traders

This Hidden Pattern Could Signal A Pop For Savvy Traders

Yesterday the US Home Construction ETF, ITB, had a very strong day fueled by a strong earnings report by MTH.

When I took a look at this situation, I found an interesting pattern that most traders are going to miss.

Home construction stocks may not sound all that exciting, but they can generate nice gains with low volatility.

Read below to see the exciting trade set up in a sector that’s often overlooked.

 

The chart of MTH below shows that it is breaking out to 5-year highs.

https://lh4.googleusercontent.com/8K_h08AjOKPTwRNLXy8ULgzFDL-GEAFKKfC0qGqtUz79pg3jWoaysNKlnyGFYDWp5drYU4_X6EntbpTkgwF9xyZ3AT3t5PQYIo7gGHdU1qHVE13TM8AvYmyIIzszzVMXfd1n2NX8

 

This is unusual. If you look at most homebuilding stocks, you’ll see a common pattern. In late 2017 or early 2018, they broke out of consolidation patterns that went back as far as 2012.

Then an early 2018 they all began a long decline that ended for most of them in December of 2018.

Most have not had very noteworthy recoveries. Most have not been able to rally back over their highs from before the 2017 breakout.

MTH clearly has, and it’s one to watch for a pullback, but that’s not today’s trade.

If you look at the chart of KBH below, you’ll see that it is trading above its July 2017 peak. If you could see farther back, you’d also see that it’s trading over its 2013 peak of $25, which was the big level to break in 2017.

https://lh4.googleusercontent.com/zAy4J-s4rmv_fkmn9fTO6Df6uSy50SEE8crzHJo_4eV8AcbUmx2kpLR6MctfaAtBpCRgqH95I8EerD5_Zo2rRhh9O2BQFDUUlggCLXae1kbtwl5MuqQap0XN0Xz-Y1n-nLGPIIVK

As a result, KBH is one of the strongest stocks in the sector on a technical basis.

If investors begin to believe that the interest rate environment will move back to a “lower for longer” mindset, then this sector could really heat up.

The trade setup is to be a buyer with a stop under $25.40. Yesterday’s close over $27 was a good breakout over major consolidation.

The high of the consolidation is $27.64, but I don’t think I’d wait for that.

If KBH is trading over $27 on Friday, or (if you prefer to wait) on Monday, it’s a buy with a stop under $25.40.

It may pop quickly, but I’d look at it as a slow trend higher.

If it gets back to its highs around $37.50, that’s a 40% move!

You could also leverage that with some long-dated calls. 

Trade smart,

Rick Nartarian, Chief Investment Officer
The American Investor Daily